Sales Tax Raise Delayed in Japan: What Does it Mean?

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Japanese Prime Minister Shinzo Abe confirmed this week that he intends to push back the planned hike in the country’s sales tax from eight to 10 percent for two years, to October 2019. The confirmation follows Abe’s press conference at the recent Group of Seven summit meeting (G-7) in central Japan.

Abe’s decision reveals a number of interesting things about Japanese politics.

Gaiatsu: “Foreign Pressure” made Japan Postpone a Tax Increase

The first is the role of gaiatsu, translated as foreign pressure. Japanese politicians, faced with difficult, unpopular or controversial decisions, often fall back on the excuse that they were pressured or convinced by foreign leaders to make their choice. The tactic deflects critics and certainly allows blame to be pushed out across the ocean if things don’t turn out so well. In the case of the sales tax, Abe was eager to get the G-7 endorsement, to sell the delay as bowing to global necessity.

Wait — why is it necessary to “sell” a postponement of a tax increase?

The sale isn’t so much about the sales tax per se, but about Abenomics, the Prime Minister’s signature set of initiatives designed to lift Japan’s economy out of its seemingly-endless doldrums. Critics have claimed the planned jump in sales tax was an indicator of failure, a desperate move by the Abe government to raise revenues and bail out its program. So, for the Prime Minister to have a “good reason” to explain the delay may help mute his political opposition. While Abe himself remains more or less popular, his economic programs are disliked by about half of the Japanese surveyed.

Doubling down as he postpones the sales tax rise, Abe is also preparing a new fiscal stimulus package of some $54 billion. He is well aware that sluggish growth of private domestic consumption is a drag on his economy, and that consumer spending in Japan plunged following the previous consumption tax increases in 2014 and 1997. Seeing his stimulus package wiped out by a simultaneous sales tax hike that slowed consumer spending would likely kill Abenomics, if not send Abe himself out of office.

The Real Reasons Behind the Delay of the Sales Tax Hike

Screen-Shot-2015-06-24-at-10.59.48-AMImage Source: The Money Illusion

There are also more prosaic reasons for delaying the sales tax hike, recognizable by any politician.

Most immediately, Abe’s Liberal Democratic Party wishes to retain its majority in the Upper House of Parliament. Elections are scheduled for July, so delaying a tax increase now is good timing. Abe is expected to end his term as Prime Minister before the increase is scheduled to kick in in 2019, meaning the impact on the public may not be his problem to deal with. Lastly, lavish government spending on the 2020 Olympics, alongside many people’s belief that the process has been full of corruption, suggests seeking more money right now is not a smart move.

At the same time, revenue shortcomings are not a problem that will go away easily. Japan’s fairly generous social welfare system, particularly its services to an ever-growing elderly population, is untouchable by any politician. And Abe can’t catch a break; Japan’s trillion dollar national pension fund lost $64 billion in late 2015 after some poor choices in the stock market. Japan’s public debt remains at almost 240 percent of the gross domestic product.

Since its inception in 1989 at only three percent, the sales tax in Japan has rubbed people once comfortable with generous consumer spending the wrong way. That tax is now tied to both what is perceived as selfish political moves by Abe, and to an unpopular policy of Abenomics, suggests the Prime Minister’s economic issues are not going away anytime soon.

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